Business Loan Tax
A business loan is one of the most popular financing options that are available to business owners in India. It is an accessible avenue for instant funds that can be used to meet a variety of business needs. Even though there is an interest component attached to the business loan, the benefits far outweigh the cons.
There are several myths regarding benefits to business owners on business loans. These are:
1. Interest Paid on Unsecured Business Loans are Tax-Deductible:
This is one of the most prevalent myths regarding business loan tax benefits. Do note that this is not true for unsecured business loans.
2. Principal Amount on Business Loan is not Tax-Deductible:
This one is actually true, for almost all types of business loans. Any business loan comprises two components – the principal amount and the interest.
Whilst the interest element may be tax deductible only in the case of secured business loans taken for the purpose of purchasing immovable assets such as commercial property or land, business owners cannot claim any tax benefits on the principal amount paid to the lender on the business loan.
This does not fall under the purview of business expenditures. Conversely, there is no requirement to pay tax on the principal amount borrowed either. Tax liability is only applicable to the net income that is earned by the business owner.
Business owners can avail tax benefits on a business loan, depending on the type of loan they take. This helps to lower their overall tax liability that mitigates a part of your fund outflow that is paid as the interest rate on business loan. However, you must be aware that most unsecured business loans do not have any tax benefits at all.
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